The Investment Pitfalls in the Melbourne Property Market: A Look at the Two-Speed Dynamic

Melbourne's property market is heating up, with many commentators, believing it’s the right time to get in at the early stage of the next phase of the property cycle.

But before you dive in, it is important to understand the two-speed phenomenon that could cool off your investment plans faster than you think.

Now, I believe there are great investment opportunities in the Melbourne property market, however, the appeal of this vibrant city can also present certain pitfalls, especially as I can see market dynamics shifting towards what could be termed a "two-speed" property market.

Understanding the two-speed market

Obviously, a two-speed market occurs when different segments of the market move at divergent paces.

I can see this happening in Melbourne driven by interstate investors who, drawn by the allure of the city’s growth prospects and robust economy, choose to invest in, or to put it more correctly are recommended by inexperienced interstate buyers agents to invest in, what they perceive as 'hotspots'.

We’ve seen this in other locations over the last couple of years where the influx of investors leads to rapid price surges in specific areas, while other parts of the market lag behind.

What’s happening now?

We’re already seeing many interstate buyer’s agents looking for opportunities in Melbourne, seeing it as fertile ground for property investments due to its relatively affordable prices and strong potential for capital growth.

They are buying cheaper properties in Melbourne’s outer suburbs, where prices are affordable, but this focus results in a hyper-competitive market in these locales, often inflating property prices beyond their intrinsic value due to their speculative buying.

The local nuances

On the other hand, local investors have a more nuanced understanding of the Melbourne market.

They know these outer cheaper suburbs don’t have the lifestyle features or local economic growth drivers to keep them in continuous strong demand for the coming decades.

Nor do they have the correct local demographics for successful investment - people whose wages are going up faster than average, conversely.

And they don’t have sufficient infrastructure to cope with all the new housing supply that is being created there.

Risks for unwary investors

The primary risk in a two-speed market is the trap of investing based on hype rather than solid fundamentals.

Many of these new investors will get caught up in a feeding frenzy in 'hot' markets, driven by fear of missing out (FOMO), leading to poor decision-making.

Here are several traps to watch out for:

1. Overcapitalisation: Investors might pay too much for properties in hyped areas, where growth potential is already maxed out. Such investments often lead to negative equity if the market adjusts downwards or if the hype dies down.
2. Neglect of Rental Yields: In the rush to capitalise on capital gains, a basic tenet of investing—rental yield—can be overlooked. Areas that are popular with investors might not necessarily appeal to renters, leading to high vacancy rates and low returns.
3. Liquidity Issues: Properties in the hottest parts of Melbourne might see great short-term growth, but they could also be the first to suffer in a downturn, as they might not offer the long-term stability that comes from genuine local owner-occupier demand.
4. Ignoring Economic Fundamentals: Investment should be driven by long-term economic fundamentals, such as population growth, employment growth, wages growth and infrastructure development, rather than short-term trends or isolated developments.

Strategic Considerations

To navigate Melbourne’s developing two-speed market, consider the following strategies:

• Research is Crucial: Understand the broader economic indicators that drive market growth in Melbourne. Look beyond the headlines and dive deep into council plans, future infrastructure projects, and demographic trends.
• Long-term Perspective: Focus on long-term horizons when investing in property. Melbourne's growth is influenced by many factors that may not be immediately impactful but can drive significant returns over time.
• Seek Local Expertise: Engage a property strategist and buyers’ agent who knows the Melbourne market intimately, rather than interstate advisors who look at properties over the Internet and FaceTimes the local estate agents. This can provide insights that are not immediately apparent through market reports or investment seminars.

Conclusion

I believe investing in Melbourne’s property market offers exciting opportunities but requires a keen awareness of its inherent complexities.

By understanding the dynamics of the developing two-speed market, investors can better position themselves to capitalise on the genuine growth potential while avoiding the common pitfalls fuelled by external hype and speculation.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.